INBU 4200 -- INTERNATIONAL FINANCIAL …



INBU 4200 -- INTERNATIONAL FINANCIAL MANAGEMENT

FALL SEMESTER 2005 – LEEDS SCHOOL OF BUSINESS

SECTION 001 MW 11:00 - 12:15 ROOM 353

SECTION 002 MW 12:30 - 1:45 ROOM 353

Professor Michael Palmer

Office Phone: (303) 492-4241

E-Mail: Michael.Palmer@Colorado.EDU

COURSE DESCRIPTION: INBU 4200 will explore many of the financial issues confronting managers of today’s global firms. The course will focus on the unique “international” financial environments and associated risks that confront global firms and the strategies they use for dealing with these environments and risks.

COURSE TOPICS:

1) Globalization Process and International Finance

The globalization of consumption, production and financial markets

The implications of globalization for financial managers

The international monetary system

Regimes for determining exchange rates

2) International Capital Markets

The international money markets

The international foreign exchange markets (Forecasting exchange rates)

International debt markets

International equity markets

3) Foreign Exchange Exposure: Risk, Measurement and Management

The types of foreign exchange exposure and resulting risk

Foreign exchange risk management

Operational strategies of the global firm

Using financial market contracts to manage risks

4) Foreign Market Entry Modes

Foreign Direct Investment (FDI)

Wholly owned subsidiaries

Joint Ventures

Cross Border Mergers and Acquisitions

Capital structure issues

Country differences in capital structures

Cost of capital implications for the global firm

5) Working Capital Management Issues for the Global Firm

Managing working capital

Moving funds cross border

Exporting and importing issues for global firms

Corporate governance issues

Cultural differences facing global managers

REQUIRED READINGS: TEXT

International Financial Management, by Eun and Resnick, Irwin, 3rd ed, 2004

REQUIRED READINGS: FINANCIAL PRESS

You are required to read either the Wall Street Journal or the Financial Times on a regular basis. You may subscribe to either (I have subscription forms). Either of these will help to keep you current on international financial market and international business issues.

OFFICE INFORMATION:

Office:   453 (in the Business School)

Phone:  303-492-4241 (please leave message if I’m not there)

E-Mail: Michael.Palmer@Colorado.Edu

Office hours: Tuesday and Thursday 11:00 – 1:00 and by appointment.  

(REVISED) COURSE SCHEDULE:

Week 1: Chapter 1: The Globalization Process.

Week 2: Chapter 2: The International Monetary System

Week 3: Monday, September 5th, Labor Day (no class)

Week 3: Chapter 3: The Balance of Payments

Week 4: Wednesday, September 14th: Quiz 1 (Chapters 1-3, handouts, and lectures).

Week 4: Chapter 4: The Foreign Exchange Market

Week 5: Chapter 5: International Parity Relationships and Forecasting Foreign Exchange Rates

Week 6: Chapter 6: International Banking and Money Markets

Week 6: Monday, September 26th, Project 1 due.

Week 7: Chapters to be announced

Week 7: Monday, October 3rd, Quiz 2 (Chapters to date, handouts, and lectures).

Week 8: Monday, October 10th, Exam 1 (Chapters 1-6 and lectures).

Week 8: Chapter 7: International Bond Markets

Week 9: Chapter 8: International Equity Markets

Week 9: Chapter 11: International Portfolio Investment

Week 10: Chapter 12: Management of Economic Exposure

Week 10: Chapter 13: Management of Transaction Exposure

Week 10: Chapter 14: Management of Translation Exposure

Week 10: Wednesday, October 26th, Project 2 due.

Week 11: Wednesday, November 2nd, Quiz 3 (Chapters to date, handouts, and lectures)

Week 12: Chapter 15: Foreign Direct Investment and Cross-Border Acquisitions

Week 13: Chapter 16: International Capital Structure and Cost of Capital

Week 14: Monday, November 21st, Quiz 4 (Chapters to date, handouts, and lectures)

Week 14: Wednesday (No Class)

Week 14: Chapter 17: International Capital Budgeting

Week 15: Chapter 21: Corporate Governance Around the World

Week 15: Wednesday, November 30th, Exam 2 (Chapters 7-8, 11-17, and 21 and lectures)

Note: Above chapter schedule is subject to change based on semester work!

EXAMINATIONS:

INBU 4000 exam schedule will consist of the following:

1) Four short quizzes given approximately every third week (except during week of major exam) on dates noted. These short quizzes will cover daily lectures, text chapters, and any handouts and will not be cumulative. Quizzes may include true/false, multiple choice, definitions, calculations, and short essay questions. These quizzes are designed to keep you current with the course material. Make up quizzes will not be offered. Therefore, please make every effort to meet this quiz schedule (if you have a conflict or problem with this quiz schedule please see me as soon as possible).

2) Two major exams consisting of true/false, multiple choice questions, calculation questions, and short essay questions from the lecture material and the text. Major exams will be cumulative with regards to lecture material but not with regard to text. Major exams will be given only on the days indicated (exams will be given during regular class time). Make up exams will not be offered. Therefore, please make every effort to meet this exam schedule (if you have a conflict or problem with this exam schedule please see me as soon as possible).

3) Note: Absences from quizzes or major exams due to documented medical reasons will be handled on an individual basis.

4) Pop quizzes (for extra credit) will also be given!

PROJECTS:

You will be assigned two projects during the term. These will be done on an individual basis and will be limited to two typed page. Project assignments will be given approximately one week in advance. Projects will be due at the beginning of the class on the due date (see schedule above). Note: Late projects will not be accepted; however late projects due to documented medical reasons will be addressed on an individual basis.

WRITTEN REPORT ASSIGNMENT 1

Research any U.S. company (except MacDonald’s) with global activities and discuss the globalization of that company and the impact of foreign currency exposure of the firm’s financial performance. Include in your written report:

1. A discussion of the company (what it does) and the extent of its global operations; for example, the company’s percent of sales or revenues from outside the United States.

2. The major markets (countries) it is operating in (selling and/or manufacturing) and the currencies associated with these foreign markets.

3. The reported impact of the exchange rate changes on the company’s financial performance (as noted in their most recent financial statement).

4. Strategies which the company uses to manage their foreign currency exposure (again, as noted in their most recent financial statement)

5. What happened to the relevant exchange rate(s) for this company since the beginning of 2005? What impact do you think this has had on the company’s financial performance thus far in 2005?

Report needs to be typed, single-spaced, and no more than two pages (please do front and back of single piece of paper). You must include all references used. See McDonald’s example at end of course syllabus. Include name and course section at top of first page.

Written report is due at the beginning of class, Monday, September 26th. Written report will be graded on the basis of (1) the quality of the written document itself and (2) the coverage of the material.

COURSE GRADES:

INBU 4200 final course grades will be based on the following:

Points Percent of Total

1) Four quizzes (20 points each) 80 points 20%

2) Two projects (30 points each) 60 points 15%

2) First Exam 100 points 25%

3) Second Exam 120 points 30%

4) On time attendance (20 days @ 2 points each) 40 points 10%

Total Possible Course Points 400 points

LETTER GRADES:

Based upon 400 possible points for the course, final letter grades will be determined as follows:

A = 90% and above (360 points)

B = 89.9% to 80% (320 points)

C = 79.9% to 70% (280 points)

D = 69.9% to 60% (240 points)

F = 59.9% and below (239 points)

At the beginning of the semester, each student starts with 400 points; during the semester, points are deducted from this amount according to your quiz, project, major exam, and attendance scores. This way, you will know what your letter grade is throughout the semester and what the break is for the letter grade below (note: everyone starts off with an A; if you lose 40 points you drop into the B range; if you lose 80 you drop into the C range; if you lose 120 you drop into the D range, and if you lose 161 you will get an F).

ATTENDANCE POLICY AND ATTENDANCE GRADE

Attendance will be taken on other than quiz and major exam days; there are 22 of these during the semester (beginning Monday, August 29th, ending December 5th). You are entitled to two absences (unexcused) bringing the total non-quiz and non-major exam days to twenty. Sign in sheets will be used to take attendance. Note: Late attendance counts as non-attendance. Note: Attending all 22 classes, will result in 4 extra credit points.

I would also ask that you do not leave the classroom in the middle of a lecture. Please prepare yourself for this expectation.

All students will be provided with name cards by the end of the first week of class. Please be responsible for these and bring them to class with you on a daily basis.

HOME PAGE LECTURE NOTES

Lecture notes will be available on my home page

Look under “Current Courses.” Make sure you view Fall 2005 schedule.

OTHER INFORMATION: LONDON SEMINAR IN INTERNATIONAL FINANCE

Those of you interested in the summer 2006 London (and Paris) Seminar in International Finance please view the information on my home page under “Current Courses.” The 2006 program will run for five weeks from Monday, July 11th through Friday August 11th. Applications will be accepted during the fall semester 2005. The seminar is limited to only 24 students.

COURSE LEARNING OBJECTIVES

1. To develop an understanding and appreciation of the critical financial issues facing managers of international firms along with the techniques for managing these financial environments.

2. To develop a practical framework for the analysis of the exchange rates including an understanding of forces affecting exchange rates and possible models and approaches for forecasting exchange rates.

3. To develop students’ research, observation, and writing skills in the area of international finance.

PROJECT 1 EXAMPLE: MCDONALD’S CORPORATION

Background on the Company

The Company primarily operates and franchises McDonald’s fast food restaurants. As of 2004, McDonald’s had 31,561 restaurants in about 120 countries worldwide. Of the total, 9,212 were Company operated (i.e., company owned), 18,248 were operated by franchisees and licensees and 4,101 were operated by affiliates.

Global Operations by Region and Restaurant Distribution

The business is managed as distinct geographic segments. These are the United States; Europe; Asia/Pacific, Middle East and Africa; Latin America and Canada. A breakdown of McDonalds 31,561 restaurants for 2004 shows that 57% are located outside of the United States.

Restaurants Number % of total

Total 31,561 100%

United States 13,673 43%

Europe 6,287 20%

Asia/Pacific, Middle East/Africa 7,567 24%

Latin America 1,607 5%

Canada 1,362 4%

Other 1,065 3%

Source of Revenues

Revenues consist of sales by Company-owned restaurants and fees from restaurants operated by franchisees and affiliates. Fees from franchisees and affiliates primarily include rent, service fees and/or royalties that are based on a percent of sales. Franchise and license agreements generally have 20-year terms.

Global Distribution of Revenues Foreign Currencies

For 2004, 66% of the Company's revenues were from outside the U.S.

Revenues (Millions of $) 2004 % of Total

Total $19,065 100%

U.S. $ 6,525 34%

Europe* $ 6,737 35%

Asia/Pacific, Middle East/Africa** $ 2,721 14%

Latin America*** $ 1,008 5%

Canada $ 898 5%

Other $ 1,176 6%

*France, Germany and the United Kingdom account for 65% of Europe’s revenues

**Australia, China and Japan account for 45% of the region’s revenues

***Brazil accounts for 40% of Latin America’s revenues.

Foreign Currency Impacts on Company

Given the distribution of McDonald’s restaurants and revenues, the Company’s overall dollar earnings are likely to be affected by changes in exchange rates.

Strong foreign currencies can increase dollar earnings while weak foreign currencies can be expected to lessen dollar earnings. Specifically, given the reported distribution of earnings, changes in Euro and the British Pound are especially important to the Company’s revenues.

2003 and 2004 Foreign Exchange Impacts on McDonalds

In 2003 and 2004, the strengthening of foreign currencies, especially the Euro and the British pound had a positive effect on the company’s revenues. In 2004, the U.S. dollar earnings of the company benefited by 6 cents per common share due primarily to the strong Euro and the British Pound.

Strategies for Dealing with Foreign Currency Exposures

The company manages its foreign currency exposures though a combination of local currency financing, natural hedges consisting of local currency purchases of goods and services, and derivative contracts, specifically, forward contracts and foreign currency options, to hedge foreign currency denominated cash flows.

Potential Impact of Exchange Rate Changes in 2005 on McDonalds

Since January 2005, both the Euro and the British pound have weakened against the U.S. dollar (the euro 11% and the pound 6.5%). This exchange rate changes, thus far, would be expected to have a negative affect of the company’s global earnings.

Source of Information

Company 2003 and 2004 financial statements as found on

Exchange Rate Data from:

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